Key Takeaways From Guess’s Q4 Earnings

by Trefis Team
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Guess released it Q4 FY 2017 results on March 15th. The main highlight of the earnings call was how the company’s capital allocation and focus in international markets (accounting for over 50% of its business) was reaping benefits, while its Americas market continued with its decline. The company has decided to reduce footprints in its Americas market (that includes the U.S., Canada, Brazil, and Mexico) while trying to increase profitability in the region. On the other hand, Guess is growing solidly in both Asia and Europe. Over the last couple of years, along with the advent of its new CEO, Guess has increased its focus in Asia with a special focus on China. As the company continued with opening new stores in both Asia and Europe, it closed down a lot of stores in the Americas. The resulting impairment charges incurred by the shutdown of stores was the main factor leading to around a 70% decline in Guess’s operating income in the fourth quarter. For the full fiscal year 2017, Guess’s revenues growth remained flat at ~$2.2 billion while its operating income declined by 81% y-o-y to almost $23 million.

q416 results

Region Wise Performance Analysis 

  • Americas

In line with the previous quarters, Guess’s performance in the Americas remained weak in Q4 as well. The U.S. retail revenues declined mainly due to the declining traffic in the brick and mortar stores even during the holiday season. The Americas wholesale business demonstrated a 1% y-o-y growth fueled by sales in both the U.S. and Canada.

On the bright side, Guess’s plans to grow the profitability of its Americas (includes U.S., Canada, Mexico, and Brazil)  business has been progressing well.

  • Rent Reduction: Even after renegotiating its 72 store leases, it closed 19 stores in the region thereby resulting in a net cash saving of $4 million.
  • Store Closures: It has shut down 62 stores in the Americas region over the last couple of years including 10 stores in Q4 FY 2017. The annual improvement in operating income as a result of these steps is estimated to be around $16 million.
  • Supply chain: The company’s plan to form sourcing networks in low cost regions such as Bangladesh, Pakistan, and Cambodia and building relationships with high quality suppliers has been progressing well and might result in a cost saving of around $8 million by 2018. The cost saving initiative for the supply chain is being extended to Asia and Europe as well, which will result in an additional savings of around $16 million in 2017.

  • Europe

Guess’s growth in Europe was driven by an increased number of store openings, positive comparable sales, a greater footfall and sales conversion, and the rapid growth of e-commerce. In Q4, Guess opened 15 directly operated stores in locations including Spain, Portugal, Denmark, Sweden, Turkey, Russia, and Poland, resulting in a total of 56 stores in the region. It plans on opening 60 new stores in this year. The retail business in Europe, accounting for around 55% of total European sales, is growing faster than the wholesale business.

  • Asia

Guess’s CEO, Mr. Victor Herrero, aims to grow the Asia business significantly and towards that end the company has doubled its capital allocation for the Asian stores and the e-commerce business in Asia with a greater presence in websites like Tmall, JD.com, and Guess.cn. In Q4, Guess’s revenue growth in Asia was driven by new store openings, a rise in e-commerce sales, and  comparable store sales growth in Greater China. It opened 13 stores in Asia in Q4, leading to a total of 54 stores in the region. A total of around 35 new stores will be opened this year. Guess’s aim is to grow in Asia with a special emphasis on China and hence it opened new stores in several Chinese cities including Shanghai, Beijing, Kunming, Changsha, Chongqing, Shiyan, Harbin, Nanjing, Suzhou, and Wuxi.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Guess

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